On Thursday, Mario Draghi, President of the European Central Bank, announced a Stimulus Package of monetary tools, which are intended to nudge the economy upward. The ECB is the monetary authority that regulates the Eurozone, the 19 European Union member nations that share the common currency, the Euro. There is some question, however, as to whether monetary stimulus alone may be effective at the current minimal interest rate. Additionally, growth can also be stifled may by inflation, which is at a negative 0.20%, considerably below the ECB’s goal of 2.0%.
The Gross Domestic Product for 2015 is expected to have grown by 1.8% for the E. U, while that of the Euro Area will be 1.5%. In 2016, the GDP growth rate of the E. U. and Euro Area are projected to rise to 2.1% and 1.8%, respectively. The financial markets responded in quite a haphazard manner following the ECB announcement. Initially, the EURO STOXX 50 Index, of 50 blue chip stocks from 12 Eurozone nations, rose sharply, but then it closed the day down by 1.8%.
The Stimulus Package contained a curious array of monetary tools, such as cutting the key lending rate to 0.00% and increasing the monthly bond-buying program. The ECB controls only monetary policy; while fiscal tools—which some believe to be the preferred policy under such conditions—remain in the hands of each of the Euro member nations, respectively.
So far in the recovery, monetary tools have hardly encouraged banks to lend, or consumers and businesses to spend. Government spending, such as on infrastructure projects–repairing highways, bridges, tunnels, etc–could put people to work quickly, increase consumer spending and, in turn, add to the tax revenue.
The E. U. seems to have an aversion for fiscal stimulus. For the most part, that is probably due to the inability of the ECB to coordinate such actions on the part of the various member nations. More specifically, however, once deficit spending especially were unleashed, the generally free-wheeling habits nations of the South and the more restrained ones of the North could probably never be able to reconciled again. That inability to coordinate both fiscal and monetary policy, I believer, is why the Eurozone might never be able to truly live up to its original expectations.